Inflation Is Not a Social Policy

November 2, 2020 Updated: November 4, 2020


Central banks continue to be obsessed with inflation. Current monetary policy is like the behavior of a reckless driver speeding at 200 miles per hour, looking in the rearview mirror, and thinking, “We haven’t crashed yet. Let’s accelerate.”

Central banks believe that there’s no risk in current monetary policy based on two wrong ideas: 1. that there’s no inflation, according to them, and 2. that benefits outstrip risks.


The idea that there’s no inflation is untrue. There’s plenty of inflation in the goods and services that consumers really demand and use. The official consumer price index (CPI) is artificially kept low by oil, tourism, and technology, disguising rises in health care, rent and housing, education, insurance, and fresh food that are significantly higher than nominal wages and the official CPI indicates. Furthermore, in countries with aggressive taxation of energy, the negative impact on the CPI of oil and gas prices isn’t seen at all in consumers’ real electricity and gas bills.

A recent study by Alberto Cavallo of Harvard Business School (pdf) shows how official inflation isn’t reflecting changes in consumption patterns, and concludes that real inflation in the United States is more than double the official level based on a COVID-19-era average basket. Also, according to an article by James Mackintosh in The Wall Street Journal, prices are rising to up to three times the rate of the official CPI for things people need in the pandemic, even if the overall inflation number remains subdued.

Official statistics assume a basket that’s coming down due to replicable goods and services that we purchase from time to time. As such, technology, hospitality, and leisure prices are falling, but things we acquire on a daily basis and that we can’t simply stop buying are rising much faster than nominal and real wages.

Monetary Policy

Central banks will often say that these price increases aren’t due to monetary policy, but rather market forces. However, it’s precisely monetary policy that strains market forces by pushing rates lower and money supply higher. Monetary policy makes it harder for the least privileged to live day by day and increasingly harder for the middle class to save and purchase assets, such as houses and bonds, that rise in cost due to expansionary monetary policies.

Inflation may not show up on news headlines, but consumers feel it. The general public has seen a constant increase in the price of education, health care, insurance, and utility services in a period in which central banks have felt obliged to “combat deflation”—a deflationary risk that no consumer has seen, least of all the lower and middle classes.

It isn’t a coincidence that the European Central Bank constantly worries about low inflation while protests over the rising cost of living spread all around the eurozone. Official inflation measures are simply not reflecting the difficulties and loss of purchasing power of salaries and savings of the middle class.

Therefore, inflationary policies do create a double risk: firstly, a dramatic increase in inequality, as the poor are left behind by the asset price increases and wealth effect while also feeling the rise in prices of core goods and services more than anyone; and secondly, because it’s untrue that salaries will increase alongside inflation. We’ve seen real wages stagnate due to poor productivity growth and overcapacity while unemployment rates were low, keeping wages significantly below the rise of essential services.

Central banks should also be concerned about the rising dependence of bond and equity markets on the next liquidity injection and rate cut. If I was the chairperson of a central bank, I would be truly concerned if markets reacted aggressively on my announcements. It would be a worrying signal of co-dependence and risk of bubbles. When sovereign states with massive deficits and weakening finances have the lowest bond yields in history, it’s not a success of the central bank, it’s a failure.

Inflation isn’t a social policy. It disproportionately benefits the first recipient of newly created money—government and asset-heavy sectors—and harms the purchasing power of salaries and savings of the lower and middle classes. “Expansionary” monetary policy is a massive transfer of wealth from savers to borrowers. Furthermore, these evident negative side effects are not solved by the so-called quantitative easing for the people. A bad monetary policy isn’t solved by a worse one. Injecting liquidity directly to finance government entitlement programs and spending is the recipe for stagnation and poverty.

It isn’t a coincidence that those who have implemented the recommendations of Modern Monetary Policy wholeheartedly—Argentina, Turkey, Iran, Venezuela, and others—have seen increases in poverty, weaker growth, worse real wages, and destruction of the currency.

Believing that prices must rise at any cost because, if not, consumers may postpone their purchasing decisions is generally ridiculous in the vast majority of purchasing decisions. It’s blatantly false in a pandemic crisis. The fact that prices are rising in a pandemic crisis isn’t a success, it’s a miserable failure and hurts every consumer that has seen revenues collapse by 10 or 20 percent.

Central banks need to start thinking about the negative consequences of the massive bond bubble they have created and the rising cost of living for the lower and middle classes before it’s too late. Many will say that it’ll never happen, but acting on that belief is exactly the same as the example I gave at the beginning of the article: “We haven’t crashed yet, let’s accelerate.” It’s reckless and dangerous.

Inflation isn’t a social policy. It’s daylight robbery.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.